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Let's Learn to Walk…

…Before Running to International Standards

Louis Grumet

Federal officials have cited global competition and economic globalization as the impetus in the move toward International Financial Reporting Standards (IFRS). By adopting international standards, however, we may cede effective control to bodies outside U.S. borders, diminishing investors' and voters' ability to put pressure on regulators to do what the law requires.

In an increasingly global marketplace, there is pressure on regulators to standardize financial reporting. When investors and market analysts attempt to compare the financial results of companies following U.S. generally accepted accounting principles (GAAP) with others following IFRS, the task is onerous.

The Financial Accounting Standards Board (FASB) has been working with the International Accounting Standards Board (IASB) on a convergence project that will result in new proposed U.S. accounting principles, comparable with international accounting principles. With the European Union, Australia, New Zealand, and Israel having already adopted IFRS and Canada and Japan planning to adopt the standards by 2011, many investors anticipate that it won't take long for the United States to jump on board.

Does implementation of international standards make sense now?

Does implementation of international standards make sense now? No matter how worthwhile the notion of international convergence is, the vast majority of CPA professionals have been trained in GAAP. Most CPAs have little or no experience applying IFRS, thus making implementation of those standards in the United States very difficult.

Much needs to happen before the implementation of IFRS occurs. Colleges and universities will need to change curricula to include courses in international accounting. Professional organizations and educational groups will need to incorporate IFRS into training materials. The Uniform CPA Examination will need to be overhauled to reflect international accounting standards.

Under IFRS's “principles-based” approach, accountants are allowed to apply professional judgment in assessing the substance of a transaction rather than compelled to use the checklist mentality of our “rules-based” GAAP. As a result, although international accounting standards may be superior in some ways to U.S. GAAP, they are weaker in other areas. For example, foreign accounting standards permit companies to provide fewer details about mortgage-backed securities, derivatives, and other financial instruments that have been implicated in the current housing and credit crises.

A Regulatory Hodgepodge

Before convergence with international standards is implemented, the profession needs to develop a mechanism that balances the needs of an increasingly global investing public with federal and state regulation. The general public and the federal government justifiably expect the profession to follow the highest financial reporting standards; however, sometimes that is easier said than done.

Despite the fact that U.S. and international accounting standards, as well as auditing standards, appear to be converging, there is no coherent system of regulatory oversight with real enforcement power. Currently, the SEC and the Public Company Accounting Oversight Board (PCAOB) set standards for audits of public companies, while FASB, the AICPA, the Governmental Accounting Standards Board (GASB) and the Government Accountability Office (GAO) set standards for the balance of entities. To further complicate matters, licensing standards for the accounting profession are set and enforced by individual states.

The appropriate governing bodies must take steps to build a coherent system in the United States to enforce licensing standards within the current regulatory hodgepodge. For starters, regulators could enact mobility provisions that would make it easier for CPAs to practice in different states. Only then can Congress think about addressing a treaty to ensure a coherent, efficient system of international standards and enforcement that enhances consumer protection and upholds the highest standards of the accountancy profession.

Regulatory bodies should consider a more appropriate timeline that would enable the profession to take the right steps to best serve the public in the global marketplace.

To run before we learn to walk simply does not make sense.

Louis Grumet. Publisher. The CPA Journal, Executive Director, NYSSCPA, lgrumet@nysscpa.org.

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